THE MONEY TRAIL: A special report.; China Sent Cash to U.S. Bank, With Suspicions Slow to Rise

By TIM GOLDEN and JEFF GERTH

Published: May 12, 1999

Late in the spring of 1996, Federal bank examiners discovered that the central bank of China was moving tens of millions of dollars into the United States, depositing it in a maze of accounts controlled by a fast-rising Chinese executive at a small California bank.

The regulators struggled for almost two years to understand the transactions, guessing finally that they might have been intended to hide the private fortunes of Chinese officials. They turned their findings over to the Justice Department, the State Department and the F.B.I., but officials said no legal or diplomatic action was ever taken in the case.

Only in recent months, prodded by Congressional investigators, have American officials started fitting together some of the most significant pieces of the story.

The banker in California, Nan Nan Xu, turned out to have several ties to a Chinese military officer who has been identified as the conduit for at least $300,000 sent from the military's intelligence chief to a Democratic fund-raiser, Johnny Chung, officials said.

And almost half of the $92 million that eventually flowed from China into the California bank, Far East National, came from a Hong Kong investment firm controlled in part by two men who American officials say have been associated with Chinese intelligence agencies.

The purpose of the money remains a mystery. Some Federal officials now suspect that it might have been intended to pay for Chinese intelligence operations. Others believe that it could have been amassed for political contributions or to buy sensitive military technology. And officials do not rule out that it could be related to legitimate business dealings.

But a close look at the case, based on interviews and confidential Government documents, shows that the Clinton Administration was slow to pursue or even pull together the disparate leads uncovered over several years by different agencies.

The discovery of the Chinese money flows was the sort of information that typically sets off alarms among Government investigators, and the bank examiners alerted Justice Department officials early on. But officials said the department initially gave the matter only a cursory review, even as it was separately searching elsewhere for evidence of Chinese contributions to American political campaigns.

Federal prosecutors in Los Angeles examined the case last year, but referred it back to the Justice Department in July, asking that its international-affairs section determine whether the transactions might involve criminal activity in China. A law-enforcement official said the case was investigated further, but declined to say how.

A spokesman for the Justice Department, Myron Marlin, would not comment on the inquiry, but he said the department was ''vigorously pursuing every credible allegation that has come our way.''

The State Department also agreed last year to consider raising the issue with officials in Beijing, but then decided against it, officials said. The F.B.I., which had helped Ms. Xu, a Chinese national, to gain legal residency in the United States in 1992 and then tried unsuccessfully to recruit her as an informer, paid relatively little attention to her in the years when her banking activities became suspect, several officials said.

''She just fell off the screen,'' one Federal investigator familiar with the case said.

Critics of the Administration contend that the handling of the inquiry reflects a pattern of sluggish Government responses to indications of Chinese military and espionage activity in the United States in recent years.

''This information was in the hands of the Department of Justice, Department of State, and the F.B.I.,'' the Republican chairman of the Senate Select Committee on Intelligence, Richard C. Shelby of Alabama, wrote in a letter last Friday asking the Senate Banking Committee to continue an inquiry into the matter begun by the Intelligence Committee last year.

''We also provided this and additional information to the F.B.I. and the Justice Department on numerous occasions during the course of our investigation'' this year and last year, Mr. Shelby continued. ''It is my understanding, however, that nobody from the Federal campaign contributions investigation has followed up in any significant manner.''

In interviews, Ms. Xu and her former boss at Far East National Bank, Henry Y. Hwang, denied any wrongdoing in their handling of the Chinese money, and the bank's president, Robert B. Oehler, said it had not been cited for any regulatory violations in connection with the affair. But Ms. Xu and Mr. Hwang declined to explain where the $92 million had come from or how they managed it, citing client confidentiality. Nor would Ms. Xu describe her involvement with Chinese officials in detail, other than to emphasize that she does not work for the Chinese Government.

Ms. Xu told banking regulators that much of the money consisted of Chinese loans to small investment companies that she and Mr. Hwang had established in California, documents show. Yet a detailed report on the matter written last year by investigators for the Office of the Comptroller of the Currency cast doubt on that explanation, concluding that the money was probably being hidden for Chinese officials.